Diageo sees Europe sales growth returning In 2-3 years

LONDON -(Dow Jones)- Global drinks giant Diageo PLC (DGE.LN) Monday said it expects organic sales growth to return to its European operations only in two to three years' time, as weak economic conditions, particularly in southern Europe, continue to hit demand across the region.

"I do think we have got an exceptional set of circumstances with some of these markets," Andrew Morgan, president of Diageo's European operations, told investors on a conference call.

Still, Morgan doesn't expect sales in the region to "deteriorate" this fiscal year and anticipates operating profit improving in the second half, even if it doesn't meet the level of last year. "At the year-end, we won't be at flat operating profit levels."

Diageo's European sales and operating profit in the first half, excluding acquisitions, fell 3% and 9% on the year, respectively.

Morgan also said Diageo is paring its advertising and promotional spend in markets such as Greece, Spain and Ireland, as they continue to suffer from the fallout of the economic downturn."For the time being, we have no choice. We are prepared to drop our spend significantly. I believe that is the right thing to do. We have to track our investment with the trading trajectory."

The company is continuing to either sustain or increase investment in recovering mature markets like the U.K., France and Germany, as well as emerging markets like Russia. "In Russia, we have [made] significant increases in marketing and overhead spend," Morgan said.

The London-based maker of Johnnie Walker scotch, Jose Cuervo Tequila, Guinness stout and Smirnoff vodka continues to build market share and increase sales in developing economies like Eastern Europe, Asia-Pacific and Africa. In contrast, it faces a challenging outlook in mature markets like the U.S. and Western Europe, where, in addition to cut-throat promotional competition, the discretionary spending power of cash-strapped drinkers is being squeezed by government-backed austerity measures.

Separately, Morgan said the regulatory process on the group's $2.1 billion acquisition of Turkish spirits company Mey Icki Sanayi Ve Ticaret AS is going "according to plan," but final antitrust clearance from Turkish authorities isn't expected for several months.

Morgan also said the company expects to resolve its dispute with Turkish customs authorities in the next couple of months. Diageo and other foreign liquor companies have argued with officials for six years over charges on spirits imported into the country between 2001 and 2009.

At 1520 GMT, Diageo shares were down 5 pence, or 0.4%, at 1165 pence, in a higher London market.